Keystone report seen lifting TransCanada, producer shares

By Jeffrey Jones

5 Min Read

CALGARY, Alberta (Reuters) - TransCanada Corp (TRP.TO) shares are expected to get a boost on Monday from a positive U.S. report on the company's contentious Keystone XL pipeline, as are those of Canadian energy producers under pressure from deeply discounted heavy oil prices.

The U.S. State Department, in its long-awaited draft supplemental environmental impact statement, said on Friday that the proposed $5.3 billion oil pipeline to Texas refineries from Alberta would not likely accelerate Canadian oil sands production, and by extension, fuel a spike in greenhouse gas emissions.

The report, widely criticized by environmental groups opposed to the project, is far from the final step in the Keystone XL approval process, which has now dragged on for 4-1/2 years. The Obama administration rejected the proposal and invited TransCanada to reapply last year.

A final decision is not expected until July or August, but analysts and investors welcomed the development on the heels of increasingly forceful comments by President Barack Obama and new Secretary of State John Kerry about the need to fight climate change.

"I think it's a step in the right direction in regards to removing a material risk overhanging the Canadian oil sector that has been sold to near financial-crisis lows while the rest of the stock market is reaching new all-time highs," Martin Pelletier, managing director and portfolio manager of TriVest Wealth Counsel, said on Sunday.

"While certain oil stocks may rally tomorrow, I believe that the sector will continue to trade near current levels until the Keystone is actually approved by the Obama administration."

Weak heavy oil prices, largely due to limited pipeline capacity to ship the surging supplies from the Alberta oil sands to export markets, and long-depressed natural gas markets have combined to hamper energy-producer stocks in Canada.

The Toronto Stock Exchange's energy group is down 13 percent in the past year, compared with a 0.39 percent gain in the broad TSX composite index.

Keystone XL is seen as one of the leading proposals to help lessen the Canadian oil discount, as the crude could reach a market that would pay more for the supplies in large volumes.

Eventual approval or rejection of Keystone XL will be subject to politics, and not just the conclusions in the environmental report, which is now subject to a 45-day public comment period, BMO Capital Markets analyst Carl Kirst said.

"Keep in mind this SEIS does not conclude with a suggested ruling, but it should greatly inform 'the facts' that Sec. Kerry has vowed to base the decision on," Kirst wrote in a research note.

Shares in TransCanada, the country's largest pipeline company, ended 23 Canadian cents lower at C$47.81 on the Toronto Stock Exchange on Friday, though details within the State Department's 2,000 page report were coming to light as the market was closing.

FirstEnergy Capital Corp analyst Steven Paget said he believes the pipeline will be approved by September 1, but cautioned that further delay could cost the company $750 million-$800 million in annual operating earnings starting in 2015, the target in-service date.

Despite uncertainty over Keystone XL, the stock has performed well recently hitting an all-time high, due to the stability of earnings from its established pipeline and power generation businesses across North America, and its steadily climbing dividend. The stock has climbed 9 percent in the past year.

Analysts and investors pointed to several producer stocks that could also log gains on Monday, not least of which being Canadian Natural Resources Ltd (CNQ.TO), the country's largest independent oil explorer and producer.

Canadian Natural, a major heavy crude producer, has committed to shipping 120,000 barrels a day on Keystone XL. At a Friday close of C$32.05, the stock is down 14 percent in the past 12 months.